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This commentary briefly summarises each of these important developments and their practical implications. We also cut through the alphabet soup of NBN acronyms and provide an overview of the evolving landscape for the NBN. Finally, we identify key developments that we can expect in the coming months.

This commentary is the eighth in our series of NBN Updates.

What will happen to the NBN if the Government changes?

As anyone in Australia will be aware, a formal leadership challenge occurred within the Australian Labor Party (ALP) on 27 February 2012 resulting in renewed industry speculation as to the future of the NBN if the Government were to change. The next Australian federal election must occur before 30 November 2013.

The following comments summarise (without political bias) what could happen if a Liberal-National Coalition were to form Government in Australia. If the ALP continued in Government we assume there would be no change in NBN policy.

The current policy of the Liberal Party of Australia is that a Liberal-National Coalition Government (Coalition) would cancel the NBN rollout and promote a private sector solution.

Importantly, the Coalition still has the objective of delivering a uniform NBN that provides 97 per cent of Australian premises with speeds between 12 and 100 Mbps. The fundamental difference between Coalition and ALP policy is that the Coalition would give primacy to a private sector solution, supported by selective Government funding directed at areas of market failure. A new National Broadband Commission would oversee the allocation of this funding under a competitive tender.

Recent comments indicate that the Coalition would adopt a pragmatic approach when implementing this policy. The Coalition would seek to transition from existing NBN arrangements in the most cost-effective and rational way. A first step would involve a public inquiry, probably via the Australian Productivity Commission, to identify the most cost-effective way to achieve Coalition objectives.

When identifying the optimal NBN solution to give effect to Coalition policy, the Coalition will need to solve for many policy variables. Many of these variables are inherently uncertain and some of them are beyond the Coalition’s control. Some of these variables are as follows:

NBN Co may be contractually committed to incur future expenditure

Implementation of Coalition policy will require an analysis of existing contractual commitments by NBN Co Limited and NBN Tasmania Limited (together ‘NBN Co’). At this stage, the relevant commercial contracts are confidential to NBN Co so the nature and extent of such obligations is unknown. On the one hand, for example, key NBN contracts could already provide for NBN cancellation. On the other hand, NBN may be contractually obliged to incur expenditure to an extent that requires continuation of aspects of the current NBN.

The Senate may not be controlled by the Coalition

Implementation of Coalition policy may require significant legislative change. As of today, the ALP and the Australian Greens control a majority of the Australian Senate. The Coalition may need to negotiate a legislative compromise to receive Senate endorsement. Political pragmatism could be a feature of any alternative NBN solution.

Alternative commercial arrangements may be required with Telstra

The ‘Definitive Agreements’ between Telstra Corporation Limited (Telstra), NBN Co and the Government contemplate compensation that is payable to Telstra if the NBN is cancelled. However, this compensation is based on a 20 per cent fibre rollout threshold that will not be achieved by NBN Co before the next Federal election. A more relevant policy issue is the extent to which alternative NBN solutions may require access to Telstra infrastructure such as duct, fibre, or copper. Alternative commercial arrangements with Telstra may be required.

Private sector solutions may face higher financing costs

Under the current NBN model, taxpayers ultimately assume the NBN investment risk. The Government has sought to mitigate some risks within its control. Regulatory risk has been reduced by increasing certainty in NBN cost-recovery. Take-up risk has been reduced by creating disincentives for competitive superfast network build and by coercing Telstra to migrate customers from copper to fibre. An alternative NBN solution may require similar or analogous policy measures to reduce investment risk and hence reduce private sector financing costs.

Given the number of variables and their uncertainty, the precise NBN outcome if the Coalition were to form Government is inherently difficult to predict. The Coalition’s objective, in essence, is a more cost-effective NBN that maximises the role for the private sector. The Coalition is likely to determine the optimal NBN outcome only once an entity such as the Australia Productivity Commission has carefully analysed all relevant information and made policy recommendations.

Given the above, anyone contracting in the context of the NBN faces significant and continuing political risk. If the Government were to change, there is much uncertainty regarding the precise manner in which any NBN would proceed. Contracts should be drafted with such risks in mind.

Telstra will undertake Australia’s largest ever network migration

Under the SSU, Telstra will achieve structural separation of its fixed network by 1 July 2018 via the progressive disconnection of premises from Telstra’s copper access network and their connection (or ‘migration’) to the NBN fibre access network. Telstra will also cease to supply broadband Internet access services over its hybrid fibre coaxial (HFC) network, but will continue to provide subscription television (or ‘pay TV’) services such as Foxtel. In this manner, Telstra will undertake Australia’s largest ever network migration.

The adoption of the ‘migration’ model of structural separation was the Government’s preferred model, but will take time to implement given that it requires NBN fibre rollout. As an interim measure, the SSU specifies transparency and equivalence measures that will apply to Telstra during the NBN rollout period.

The combined practical effect of the SSU and Migration Plan is therefore twofold.

First, end users will be migrated from copper to fibre under a defined migration process:

The Migration Plan sets out the manner in which migration will occur, consistent with various principles pre-determined by the Minister. Key features of the Migration Plan include:

the use of existing standardised Telstra disconnection systems and processes;

Telstra is prohibited from supplying a new copper service to a premises (except for special services) once NBN is capable of supplying fibre to that premises; and

where end users are customers of another provider, the provider has some timing flexibility so as to align copper disconnection with NBN fibre connection.

Importantly, those end users that do not voluntarily migrate from copper to fibre will ultimately be involuntarily required to migrate (known as ‘managed’ or ‘forced’ migration) under a mandatory disconnection process. Once NBN fibre has passed 90 per cent of premises in a region, NBN Co will announce that the region is ‘ready for service’ (RFS). Voluntary migration will occur until a date 18 months after the RFS. From that 18 month cut-off date, Telstra will have 10 business days within which to disconnect all remaining premises from copper in that region. A number of exceptions apply that may delay disconnection of premises in certain circumstances.

Second, Telstra is subject to stricter operational ring-fencing before migration:

An interim equivalence regime applies in the period prior to migration. Telstra is subject to transparency and equivalence obligations that apply to regulated services that it supplies to wholesale customers over its copper access network. These obligations are directly enforceable by the ACCC, including:

specific commitments to price equivalence and transparency, including supply of relevant regulated services under a default ‘rate card’ at regulated prices. Telstra must equivalently allocate costs between wholesale and retail and regularly report on key service input costs, including comparable unit costs and wholesale yields;

specific commitments to non-price equivalence and transparency, including the operational and technical quality of services, systems support and information flows. If certain equivalence metrics are contravened, rebates are payable to wholesale customers; and

continued operational ring-fencing of Telstra Wholesale to protect the confidential information of wholesale customers, supported by information security measures.

A new dispute resolution procedure for wholesale customers has also been adopted, including an accelerated investigation process and an independent telecommunications adjudicator.

The ACCC’s acceptance and approval of the SSU and Migration Plan was a key condition for the commencement of Telstra’s ‘Definitive Agreements’ with NBN Co and the Government. Fulfilment of the remaining conditions is procedurally straightforward and within the Government’s control. Once the Definitive Agreements have legal effect, Telstra will be contractually obliged to implement copper-fibre migration as the NBN is rolled out.

ACCC reservations regarding the acceptability of NBN Co’s SAU

On 14 February 2012, the ACCC published a detailed supplementary consultation paper regarding NBN Co’s proposed Special Access Undertaking (SAU). The SAU is intended to provide NBN Co with regulatory certainty regarding cost-recovery over a 30 year term, thereby underpinning NBN Co’s business case. The SAU also sets out key commercial, technical and regulatory parameters for the NBN.

Initial criticism was directed at the SAU by the industry on the basis that it provided NBN with excessive discretionary power. The ACCC identified these issues in its consultation paper. Other key issues highlighted by the ACCC in the consultation paper include:

concerns regarding the 30 year duration of the SAU, including the reasonableness of a proposed SAU review mechanism;

a need for greater ACCC oversight over NBN Co’s ability to amend its Wholesale Broadband Agreement (WBA) as NBN Co’s key commercial agreement for the supply of NBN services;

an absence of service level commitments by NBN Co; and

insufficient detail regarding NBN pricing and an insufficient ACCC oversight role in relation to NBN Co’s determination of pricing.

A second round of consultation is currently occurring with submissions due to the ACCC by 30 March 2012. Once the ACCC has considered those submissions, it has the option of either outright accepting or rejecting the SAU, or issuing a notice identifying amendments that would make the SAU acceptable under the current review procedure. At this stage, it seems unlikely that the SAU may be accepted outright by the ACCC, hence amendments by NBN Co may be required.

New regulated services to assist the transition to the NBN

The ACCC has recently applied access regulation to two new wholesale services by ‘declaring’ them under the telecommunications access regime in Part XIC of the Competition and Consumer Act 2010 (Cth). The key practical implication of declaration is that the ACCC may now determine default pricing and terms and conditions for these services that will both guide commercial negotiations and apply if negotiations were to fail.

Declaration of wholesale ADSL service

The ACCC has now declared a wholesale ADSL service. Wholesale ADSL services are primarily acquired by internet service providers to enable them to supply Internet access services over Telstra’s copper access network to retail customers. As such, wholesale ADSL services are primarily supplied by Telstra, although they can also be supplied by any entity that acquires access to the underlying Telstra copper access line (via a spectrum sharing or unbundled local loop service).

In its decision, the ACCC commented that Telstra retains a dominant position in the markets for both retail and wholesale fixed-line broadband internet access services. Regulation is intended by the ACCC to remove impediments to competitive internet service providers gaining access to Telstra’s ADSL services in the period prior to NBN deployment. As such, the declaration of ADSL is intended by the ACCC to increase competition between internet service providers in the period before NBN migration. Declaration is also intended to facilitate the effective operation of the new equivalence and transparency obligations set out in Telstra’s SSU.

Declaration of non-NBN local bitstream access service

The ACCC has declared a non-NBN local bitstream access service (LBAS) with effect from 14 April 2012, as required by recent amendments to the Telecommunications Act 1997 (Cth). The LBAS is the basic wholesale access service for the use of fibre network infrastructure. Most jurisdictions have favoured the supply of LBAS as a means to provide competitors with access to fibre infrastructure, rather than requiring that access is provided to the unlit or ‘dark’ fibre itself.

The declaration of LBAS only applies to fixed fibre local access infrastructure that is not owned by NBN Co where the download transmission rate is greater than 25 Mbps. The declaration is intended to ensure that the small number of fibre networks that are not owned by NBN Co, such as fibre in new housing estates, are subject to a wholesale ‘open access’ regime on a similar basis to NBN Co. The declaration complements the new ‘superfast network obligations’ as discussed below.

The ACCC is currently undertaking public consultation on proposed access determinations that will establish the default pricing and non-price terms and conditions for these declared services.

What developments can we expect in the coming months?

There are a number of further developments that we can expect in the coming months:

New criminal prohibitions relating to competing superfast networks

On 14 April 2012, the so-called ‘superfast network obligations’ will take legal effect, but with retrospective application from 1 January 2011. The obligations are intended to deter the deployment or upgrading of fixed infrastructure that is competitive with the NBN by requiring all fixed superfast networks to operate on the same wholesale only ‘open access’ basis. All fixed broadband infrastructure owners and controllers in Australia, as well as related entities, will need to ensure they are compliant. The obligations have broad application and involve criminal penalties.

ACCC approval of NBN Co’s Special Access Undertakings

We anticipate that the SAU proposed by NBN Co may ultimately be accepted by the ACCC, following further amendments (and potentially resubmission) by NBN Co. Once the SAU is accepted, the regulatory parameters for the pricing of the NBN services will effectively be set. The technical features of the NBN will also be locked in place as well as the NBN wholesale contracting structure. Importantly, the revised SAU may also give the ACCC a greater degree of oversight over NBN Co’s current contracting arrangements in order to resolve current industry concerns regarding aspects of those arrangements.

Commencement of the Definitive Agreements

The ‘Definitive Agreements’ document a commercial agreement between Telstra, NBN Co and the Government that underpins the business case for the NBN. Telstra has agreed to implement copper-fibre migration in return for compensation payments. Telstra has agreed to provide NBN Co with access to key infrastructure necessary for NBN rollout, such as ducts and dark fibre. The Government has agreed to reform the funding of Australia’s universal service obligation and legislation to achieve this is currently before Parliament.

Now that the SSU has been accepted, the last remaining conditions for the commencement of the ‘Definitive Agreements’ should be quickly satisfied. The Minister will need to waive a legislative requirement for Telstra to divest its HFC network and Telstra’s interest in Foxtel. NBN Co will also need to obtain formal approvals from its shareholding Ministers. Once the Definitive Agreements have full legal effect, NBN Co is intending to accelerate its fibre rollout.

Acceleration of NBN fibre rollout

NBN Co will continue to deploy the NBN in accordance with its rollout programme. As at the end of 2011, around 18,000 premises were passed by NBN fibre and around 4,000 premises were connected to the NBN, primarily for trial purposes and to receive interim satellite services. By the end of 2012, the number of premises passed by NBN fibre should exceed 500,000, comprising roughly 4 per cent of the 12 million Australian premises to be ultimately served by NBN fibre.

Please contact Dr Martyn Taylor, Partner if you have any questions arising from this commentary.